Breakage – the little secret of the incentives industry

This is an excerpt from our eBook The Ultimate Guide to Incentives which you can download for FREE here

Well, it’s not really a secret any more — but definitely lucrative.

Breakage is the amount of money the incentive provider retains because customers didn’t redeem their incentive.

It’s important to figure out your approach to this — and the relevant financial calculations — so that you can suss out your ROI projections.

Let’s take a look at an example.

Say 100 people sign up to your service, and you offer a bottle of wine as an incentive.

But then, only 70 customers redeem their voucher to order the wine. The other 30 simply forget or lose the voucher.

You’ve got the cost of 30 bottles of wine ‘left over’. That leftover amount is called breakage.

Now, who reaps the benefit of the fact that you (or your rewards provider) didn’t have to give away 30 bottles of wine?

Assuming that you provide the bottles, clearly it’s you. You can then choose how to deal with this windfall benefit.

You can chase these 30 customers down and remind them that they haven’t redeemed. Why would you do that, though? They have signed up with you, so you have your benefit, right? Any gift to them at this point is a net loss to you.

Not so fast. Don’t forget that with long-term subscription products where you want to build a basis of trust and goodwill, you gently nudging your customer to redeem their gift can reap significant benefits for you. A customer who gets reminded about their gift

will believe that you’re looking out for them (and you will harvest this benefit even if the customer then still doesn’t redeem)

will, if they then do redeem, associate the enjoyment of the bottle of wine with you.

Arguably, reminding customers of their unredeemed gift can be an investment into the long-term relationship, even if this means a small cost impact for you because you won’t enjoy the full breakage to your benefit.

What if you work with third-party incentive providers?

You might sign up with a third-party platform that provides “incentives” as a service. Loyalty Bay’sRewards Hub is one such platform — we offer gift cards from 150+ providers in any denomination you want.

These platform providers have two options: Either they pass the breakage on to you (i.e. you only pay for those gifts that your customers really redeem); Or they keep the breakage to themselves.

We at Loyalty Bay used to have two variants of Rewards Hub.

One was a variant where you didn’t pay anything to access the platform. But we then kept the entire breakage value to ourselves (i.e. our client paid for all 100 bottles, and we kept the equivalent of the 30 unredeemed ones). We don’t offer this variant anymore because we found that our customers preferred the full transparency in knowing their exact redemption rates.

And that’s why our only model for Rewards Hub is a monthly fee and whatever you pay for the gift cards you send out and that your users redeem. If you win a customer using an incentive that they then later do not redeem – good for you. You have the choice whether you remind the customer and nudge them towards redeeming, or if you keep the entire financial benefit of this non-transaction to yourself.

It’s ok if you do, we won’t tell your mum.

Why is this important?

Both approaches (nudging customers towards redemption; keeping the benefit to yourself) are legit, and it’s up to you which one you choose.

If you decide to keep the breakage to yourself, you will find that you can afford to offer a higher-value incentive. You will then probably get more customers, 30% of whom will be slightly less loyal to you because you didn’t remind them to redeem.

If you prioritise your customers’ experience and want all of them to redeem, you will need to calculate your ROI based on 100% redemption rates.

Conclusion

Breakage is a fact of life — not everyone will redeem their incentive. Run the maths on your incentive programme and ensure you know what role breakage plays in your customer acquisition and retention process.

Test before you scale!

This was an excerpt from our eBook The Ultimate Guide to Incentives which you can download for FREE here.

Let’s talk incentives!

We at Loyalty Bay are really good with winning and retaining your customers.

For example, we increased a price comparison’s website conversion rate by 17% and cut a publisher’s churn by 15% by offering personalised gift cards to their prospects and customers.

Learn what we can do to boost YOUR customer acquisition and retention, and get in touch.